Delaware law is often selected as governing law by contracting parties, but will Delaware courts automatically accept the parties’ choice-of-law selection?
Vice Chancellor Glasscock recently engaged with this question in Parks v. Horizon Holdings, LLC, No. CV 2021-0988-SG, 2022 WL 2821337 (Del. Ch. July 20, 2022). In that case, the Parks brothers sold their Oklahoma family boat building business, Parks Manufacturing, to a private investment firm, Horizon. As part of the sale, the Parks entered into covenants not to solicit the business’ customers, and to otherwise not interfere with their sold business. Those agreements selected Delaware as their governing law; as the court observed, Delaware law would generally enforce such covenants, while Oklahoma law would potentially treat them as unenforceable.
In Parks, Vice Chancellor Glasscock did not rule on the general enforceability of the covenants at issue, and instead addressed choice-of-law issues as to the non-solicit and non-interference provisions of the relevant transaction agreements. Notwithstanding the Oklahoma connections attendant to this transaction and the related documents, the court ruled that Delaware law applied. As an initial matter, Vice Chancellor Glasscock noted Delaware’s strong presumption in favor of enforcing parties’ express contractual terms—here, a Delaware choice-of-law clause. The court then undertook a choice-of-law analysis, noting that Delaware courts inquire whether a conflict exists between the two states’ laws. If so, then Delaware courts apply the Restatement (Second) of Conflict of Laws to consider whether a second state’s (here, Oklahoma) law should displace the state’s law expressly chosen by the contracting parties (again, here, Delaware). In this regard, Vice Chancellor Glasscock undertook a multi-factored inquiry pursuant to the Restatement: namely, whether (A) application of Delaware law would be contrary to fundamental Oklahoma policy, (B) whether Oklahoma had a “materially greater interest” than Delaware as to the at-issue covenants, and (C) whether Oklahoma would provide the applicable law but-for the parties’ Delaware choice-of-law provision.
The court found that factor (A)—whether applying Delaware law would be contrary to fundamental Oklahoma policy—weighed in favor of Oklahoma, given Oklahoma’s policies against restraint on employment and conduct of business. However, the court found that factor (B)—whether Oklahoma had a “materially greater interest” than Delaware—weighed in favor of Delaware. The court arrived at that determination with reference to a number of additional factors, including consideration of the place of contracting, negotiation, performance, subject matter of the contract, and location of the parties. And as to factor (C)—whether Oklahoma would provide the applicable law but-for the choice-of-law provision—the court found that Plaintiffs did not show Oklahoma law would apply to the covenants absent the parties’ designation of Delaware law because the transaction agreements represented membership interests in a Delaware LLC. As a result, the court found that Delaware law applied because the covenants were designed to protect a Delaware LLC.
Looking ahead, contracting parties often favor Delaware law—and understandably so—but it would be wise for such parties to consider whether merely selecting Delaware law will suffice in the event of a dispute, particularly where there may be questions around connectivity to Delaware. And outside of the employment context, before assuming Delaware law will apply, contracting parties may wish to evaluate differences in potentially applicable states’ laws, especially where one state’s law may bar the enforcement of a provision on public policy grounds.